Aspirational, hurried and fretting A plain reading of the budget papers, including the FM speech, makes us believe that the FM (and by implication PM) aspire to turn India into a truly egalitarian society as soon as possible but no later than 2024. Their posturing suggests that they are taking it for granted that there is no challenge to their leadership at least for next five years. They appear in tremendous hurry to showcase all the arrows in their quivers, though most of these remain unsharpened. The tone of the budget vividly shows that they are fretting about the gradual erosion in their support base and trying hard to make sure that this gradual erosion does not turn into an avalanche.

1. Union Budget 2018-19
Aspirational but fretting
Friday, 02 February 2018 OPINION
This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives,
financial situation and the particular needs of any specific person. Readers should seek financial advice regarding the appropriateness
of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should
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Aspirational, hurried and fretting
A plain reading of the budget papers, including the FM speech, makes us
believe that the FM (and by implication PM) aspire to turn India into a truly
egalitarian society as soon as possible but no later than 2024. Their
posturing suggests that they are taking it for granted that there is no
challenge to their leadership at least for next five years.
They appear in tremendous hurry to showcase all the arrows in their
quivers, though most of these remain unsharpened.
The tone of the budget vividly shows that they are fretting about the gradual
erosion in their support base and trying hard to make sure that this gradual
erosion does not turn into an avalanche.
..lacks conceptual clarity, adds to the confusion
A number of proposals in the budget contradict with the stated fiscal policy
of enablement over provision; pragmatism over populism; and predictability
& transparency over discretionary powers & ad hocism.
For example, the government had taken a very brave decision to eliminate
kerosene subsidies in a gradual fashion. But now by adding 80mn new LPG
users from BPL, it is creating a fiscal time bomb. If the political history of
India is any guide, it is a matter of time before some politician will stand at
the podium and casually announce 100% subsidy on these 80mn LPG
connections (serving potentially 200-250mn voters), setting an annual bill of
Rs800bn at current prices.
Introduction of DDT on mutual fund units is a glaring case of double
taxation - first company distributing dividend pays DDT. Then AMC
distributing dividend out of such dividend income pays DDT.
The numbers do not add up to the ambitious announcements
The allocations of fund made to various ministries belie the ambitious
targets announced. This clearly indicates that most of the announcement
may be only aspiration at this point in time. The implementation shall
depend heavily on the revenue trajectory in coming years. The medium term
fiscal targets certainly do not leave any corridor for fiscal support to many of
these schemes.
.
Union Budget 2018-19
Juxtaposing the Budget
Speech with the data
tables, one wonders
whether FM has already
accepted defeat in 2019
elections and is busy
queering the pitch for the
next government.

2. 02 February 2018
2
Bag full of promises, many potentially transformative
The budget speech of FM Arun Jaitely showcased the following schemes and
programs that could prove to be transformative if conceived and
implemented pragmatically:
(a) Upgradation of 22000 Rural Haats (flea markets) into Gramin (Rural)
Agriculture Markets (GrAM) using MNREGA and other government
schemes. These GrAMs, electronically linked to e-NAM and exempted
from regulations of APMCs, will provide farmers facility to make direct
sale to consumers and bulk purchasers.
(b) Connecting all GrAM, higher secondary schools and hospitals across
the country with all weather roads under PMGSY.
(c) ‘‘Operation Greens’’ to promote Farmer Producers Organizations (FPOs),
agri-logistics, processing facilities and professional management.
(d) propose to set up two new full-fledged Schools of Planning and
Architecture, to be selected on challenge mode. Additionally, 18 new
SPAs would be established in the IITs and NITs as autonomous Schools,
also on challenge mode.
(e) Proposal to launch the ‘‘Prime Minister’s Research Fellows (PMRF)’’
Scheme this year. Under this, the government would identify 1,000 best
B.Tech students each year from premier institutions and provide them
facilities to do Ph.D in IITs and IISc, with a handsome fellowship.
(f) 1.5lakh primary health centers to provide comprehensive health care,
including for non-communicable diseases and maternal and child
health services.
(g) National Health Protection Scheme to cover over 10 crore poor and
vulnerable families (approximately 50 crore beneficiaries) providing
coverage upto 5 lakh rupees per family per year for secondary and
tertiary care hospitalization.
(h) Scheme called Galvanizing Organic Bio-Agro Resources Dhan (GOBAR-
DHAN) for management and conversion of cattle dung and solid waste
in farms to compost, fertilizer, bio-gas and bio-CNG.
(i) Refinancing of NBFCs under MUDRA yojna.
(j) Proposal to develop ten prominent tourist sites into Iconic Tourism
destinations by following a holistic approach involving infrastructure
and skill development, development of technology, attracting private
investment, branding and marketing; and upgradation of 100
monuments of the Archaeological Survey of India to enhance visitor
experience.
(k) Propose to expand our airport capacity more than five times to handle a
billion trips a year under a new initiative.
(l) Proposal to make corporates meet 25% of their financing needs from
bond market and making "A' rated bonds (from present AA) acceptable
by institutions as eligible investment.
(m) Proposal to Invest Rs1trn for research & infra in premier educational
institutions in next 4 years

3. 02 February 2018
3
Anomalies too glaring to ignore
The budget proposals in our view are full of anomalies and contradictions.
For example, consider the following:
(a) Though a lot of promises have been made, the allocation to many key
schemes have either been reduced or kept unchanged, e.g., MNREGA,
Rural Drinking Water Mission, PM Awas Yojna, Midday Meal. (see here)
A rise of 50% in MSP for crops would mean in volume terms Mid Day
meal could be lower by 33%.
(b) The allocation for health, education, rural development and urban
development is only marginally higher in nominal terms. In real terms it
could lower than previous year.
(c) The government has been making intensive effort to promote the
investment in financial assets, especially equities since past few years.
Consequently, last two years have seen tremendous rise in inflows into
domestic equity market, both by way of investment in IPOS and Mutual
Fund schemes. The government itself has sold equity in PSU through
ETFs and otherwise.
However, while explaining the rationale of reintroducing tax on long
term capital gains on equities and mutual fund units, the rationale
given is as follows:
"Under the existing regime, long term capital gains arising from transfer
of long term capital assets, being equity shares of a company or an unit
of equity oriented fund or an unit of business trusts , is exempt from
income-tax under clause (38) of section 10 of the Act...this regime is
inherently biased against manufacturing and has encouraged diversion
of investment in financial assets."
This totally violates the promise of consistency and predictability.

4. 02 February 2018
4
(d) The scheme for giving free LPG connections to BPL families is proposed
to be enlarged to 80mn families from the current target of 50nm (out of
which 30mn are already claimed to have been given)
This scheme has to be seen in the historical perspective of fuel
subsidies n kerosene and transportation fuel. It took several decades to
undo this subsidies.
If we consider the fact that the principal opposition party (Congress)
was polled less than 200mn votes in past general elections. These 80mn
BPL families could have about 200-250mn potential voters. This would
be too lucrative a catchment area for any political party to ignore. It is a
matter of time, when some political party will make refill of these
connections fully subsidized. This would tantamount to Rs800bn
annual subsidy bill at the current LPG prices.
This scheme in its present shape is a time bomb waiting to explode.
(e) Covering 100mn families (about 500mn people) under the proposed
health insurance plan is a noble and welcome thought.
This could however possibly damage business plans of many general
insurance companies. The promised FDI in general insurance business
may take a step back for reconsideration.
(f) Proposal to develop gold as an asset class and totally rejecting crypto
currencies may not be in synch with the global trends.
(g) The government is projecting virtually no acceleration in nominal GDP
during FY18 to FY21 (see here), but still showing so much optimism is
strange.
(h) The economic survey emphasized the role of stock markets. But none of
that emphasis is reflected in the budget proposals.
(i) The proposal to tax MF dividends totally violates the promise to refrain
from double taxation and retroactive amendments.
(k) The budget completely fails to show the correlation between rise in
number of tax payers and tax buoyancy. On the contrary it cribs about
the poor average tax revenue per assessee.
(i) The budget does not seem to be factoring any problem from any sharp
rise in crude prices. Though the collective wisdom of the market is
showing rise in energy prices to lead to breach of fiscal targets and
perhaps rise in policy rates also.

5. 02 February 2018
5
Key highlights - Union Budget FY19
Economic conditions
 Manufacturing, services, and exports are back on growth path
 GDP growth at 6.3% in the second quarter of 2017-18 signals
turnaround of the economy
 Growth in 2HFY18 likely between 7.2% to 7.5%
Efforts to boost rural economy
 MSP for all unannounced Kharif crops increased to 150%
 Higher Institutional credit for agri-sector
 Fund to develop Fisheries, aquaculture and animal husbandry with
acorpus at Rs.10,000 crore
 Agri-Market Infrastructure Fund with a corpus of Rs.2000 crore
 Allocation for Ministry of Food Processing doubled to Rs.1400 crore
 Loans to Self Help Groups (SHG) of women to increase to Rs.75,000
crore by March 2019.
 Increased allocation of National Rural Livelihood Mission to Rs 5750
crore
 Housing for All by 2022 - more than one crore houses to be built by
2019 in rural areas
 Plan for employment of 321 crore person days, 3.17 lakh kilometers of
rural roads, 51 lakh new rural houses, 1.88 crore toilets, and 1.75 crore
new household
 Under Saubhagya scheme electricity connections for 40mn houselods
Promotion of MSME and employment opportunities
 Target of Rs.3 lakh crore for lending under MUDRA Yojana
 7mn formal jobs to be created this year
 Govt to make 12% contribution of new employees in the EPF for all the
sectors for 3 years
 Outlay of Rs.7148 crore for the textile sector
Infrastructure
 Increase budgetary allocation on infrastructure for at Rs.5.97 lakh crore
 35000 kms road construction in Phase-I at an estimated cost of
Rs.5,35,000 crore.
 Railways Capital Expenditure pegged at Rs.1,48,528 crore
 Regional connectivity - 56 unserved airports and 31 unserved helipads
to be connected
 Rs. 10000 crore for creation and augmentation of telecom infrastructure

6. 02 February 2018
6
Key tax proposals
Individuals and HUF
 No change in tax slabs
 Cess rate increased from 3% to 4%
 Standard deduction of Rs40,000 to be allowed to salaried employees.
 Travelling allowance and deduction for medical expense disbursement
abolished
 Transport allowance at enhanced rate is proposed to be continued for
differently abled persons
 Proposal to tax Long-Term Capital Gains exceeding Rs. 1 lakh at the rate
of 10 percent, without allowing any indexation benefit w.e.f. FY19.
However, all gains up to 31st January 2018 to be grandfathered.
 Proposal to charge dividend distribution tax @ 10% on dividends
distributed by equity mutual funds. This shall be applicable from FY18.
 No adjustment to be made for transactions in immovable property where
Circle Rate value does not exceed 5% of the consideration.
 Limit of holding period for 54EC bonds increased from 3yrs to 5yrs.
Scope of section limited only to gains arising from transfer of land
and/or building.
 PAN made mandatory for all financial transactions exceed Rs2,50,000.
In case of transactions made by corporates, all managing director,
director, partner, trustee, author, founder, karta, chief executive officer,
principal officer or office bearer or any person competent to act on behalf
of such corporate entity.
 It is proposed that any compensation received or receivable, whether in
the nature of revenue or capital, in connection with the termination or
the modification of the terms and conditions of any contract relating to
its employment shall be taxable under section 56 of the Act.
 Benefit of tax-free withdrawal from NPS extended to non-employee
subscribers also.
 TDS to be made on 7.75% GOI Savings 9taxable) Bonds, 2018.
For senior citizens only
 Exemption of interest income on deposits with banks and post offices
are proposed to be increased from Rs. 10,000 to Rs. 50,000. Benefit will
also be available for interest from all fixed deposit schemes and
recurring deposit schemes
 TDS shall not be required to be deducted under section 194A
 Hike in deduction limit for health insurance premium and/ or medical
expenditure from Rs. 30,000 to Rs. 50,000 under section 80D.
 Increase in deduction limit for medical expenditure increased to Rs. 1
lakh under section 80DDB.

7. 02 February 2018
7
Corporate and Trusts
 Cess rate increased from 3% to 4%
 It is proposed to insert a new Explanation 2A in clause (22) of section 2
of the Act to widen the scope of the term ‘accumulated profits’ so as to
provide that in the case of an amalgamated company, accumulated
profits, whether capitalised or not, or losses as the case may be, shall be
increased by the accumulated profits of the amalgamating company,
whether capitalized or not, on the date of amalgamation.
 Deemed distribution brought u/s 115-O (dividend distribution tax).
Such deemed dividend will be taxed @30% in hands of recipient.
 It is proposed to amend section 28 of the Act to provide that any
compensation received or receivable, whether revenue or capital, in
connection with the termination or the modification of the terms and
conditions of any contract relating to its business shall be taxable as
business income.
 Rate of tax increased for heavy vehicle (12MT gross vehicle weight or
more) owners u/s 44AE (presumptive taxation).
 100% deduction to companies registered as Farmer Producer Companies
with an annual turnover up to Rs. 100 crore.
 80-IAC exemption relaxed further for start ups.
 Incentives announced for firms established in International Financial
Services Centre (IFSC).
 Relaxation in number of days of employment u/s 80-JJAA presently
available to textile units extended to footwear and leather industry.
 Transactions in agriculture commodity derivatives to be non-speculative
activity even if CTT is not paid.
 Reduced Corporate Tax of 25 % extended to companies with turnover up
to Rs. 250 crore.
 More concessions for International Financial Services Centre (IFSC) to
promote trade
 Payments exceeding Rs. 10,000 in cash made by trusts and institutions
to be disallowed.
 Relief to the companies under bankruptcy resolution u/s 115JB (MAT)
and u/s 79 (carry forward of losses).
 Conversion of stock-in-trade into capital asset to attract tax.
 Amendment in section 276CC to provide for prosecution in cases of non-
filing of returns, even if no tax is payable by the assessee.

8. 02 February 2018
8
Budget Profile

9. 02 February 2018
9
Budget Estimates

10. 02 February 2018
10
Deficit and Debt statistics

11. 02 February 2018
11
Major Expenditure Items

12. 02 February 2018
12
Receipt Budget

13. 02 February 2018
13
Medium Term Fiscal Policy Goals

14. 02 February 2018
14
Outlay for major schemes

15. 02 February 2018
15

16. 02 February 2018
16

17. 02 February 2018
17
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